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B Com Exam  >  B Com Notes  >  Indirect Tax Laws  >  Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws

Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws | Indirect Tax Laws - B Com PDF Download

There are several methods to calculate the “value added” to the goods for levy of tax. The 3 commonly used methods are:

  1. Addition Method
  2. Subtraction Method
  3. Direct subtraction Method
  4. Indirect/Intermediate subtraction Method
  5. Invoice Method

 

S.N. Method VAT Liability Value Added means Popularity of the method
1 Addition Method Value Added X Tax Rate Factor payments + Profit Hardly used
2 Subtraction Method In General:Sales – Purchases Hardly used  

1. Direct Subtraction method

 Value Added X Tax Rate Aggregate value of sales (exclusive of tax) – Aggregate value of purchase (exclusive of tax)    

1. Indirect Subtraction/Intermediate Subtraction method

 Value Added X [Tax Rate/(100 + Rate)] Aggregate  value of sales (inclusive of tax) – Aggregate value of purchase (inclusive of tax)    
3 Invoice Method Tax on Sales – Tax on Inputs Widely used  

Demerits of Addition method:

  1. No set off or tax credit
  2. Not possible to detect tax evasion
  3. Profit margin is transparent
  4. Does not easily accommodate exemptions of intermediate dealers

Demerits of Subtraction method

  1. No set off or tax credit
  2. Tax payable is calculated periodically and not invoice-wise
  3. Not showing tax amount in invoice is not healthy practice
  4. Inconsistent when the rate of tax is different

Invoice Method – Merits

  1. Common and popular method
  2. No tax evasion
  3. No Revenue Loss
  4. Beneficial for the industry and trade.
  5. Profit margin is not known to competitor and customer

Note:  There are bill traders in the market who issue “fake/bogus invoices” for consideration. An unscrupulous dealer may use such invoices to claim ITC (input tax credit).

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FAQs on Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws - Indirect Tax Laws - B Com

1. What is Value Added Tax (VAT)?
Ans. Value Added Tax (VAT) is an indirect tax levied on the value added at each stage of production or distribution of goods or services. It is based on the consumption of goods or services and is ultimately borne by the final consumer.
2. How is Value Added Tax (VAT) computed?
Ans. Value Added Tax (VAT) is computed by multiplying the tax rate with the value added at each stage of production or distribution. The value added is calculated by subtracting the cost of inputs from the selling price of the goods or services.
3. What are the methods of computing Value Added Tax (VAT)?
Ans. There are two methods of computing Value Added Tax (VAT): the invoice or credit method and the subtraction or deduction method. - The invoice or credit method involves calculating VAT based on the invoices issued and received during a specific period. The VAT payable is the difference between the VAT on sales (output VAT) and the VAT on purchases (input VAT). - The subtraction or deduction method involves calculating VAT by subtracting the VAT paid on purchases from the VAT collected on sales during a specific period. The VAT payable is the difference between the two amounts.
4. How does Value Added Tax (VAT) help in tax administration?
Ans. Value Added Tax (VAT) helps in tax administration by providing a transparent and efficient system for collecting tax revenue. It reduces the cascading effect of taxes as it is levied only on the value added at each stage. VAT also encourages compliance as businesses are required to maintain proper records and submit regular VAT returns.
5. What are the advantages of Value Added Tax (VAT)?
Ans. Value Added Tax (VAT) has several advantages: - It provides a stable and sustainable source of tax revenue for the government. - It reduces the tax burden on low-income individuals as VAT is generally a proportional tax. - It promotes transparency and accountability in the tax system. - It encourages formalization of the economy as businesses need to register for VAT. - It allows for tax credits on inputs, which incentivizes businesses to invest and grow. - It is relatively easy to administer and enforce compared to other forms of indirect taxes.
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Document Description: Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws for B Com 2024 is part of Indirect Tax Laws preparation. The notes and questions for Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws have been prepared according to the B Com exam syllabus. Information about Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws covers topics like and Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws Example, for B Com 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises and tests below for Methods of Computing Value Added Tax (VAT) - Indirect Tax Laws.
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